A world of contradictions

Inflation in the US rose to 4.2% in May, against 3.8% in April, and in line with expectations from a Bloomberg poll of economists. Core inflation, stripping out food and energy prices, moved moderately higher, from 2.8% in April to 2.9%. Gasoline, a key cost for most Americans, rose by about 7% on a monthly basis and was up by more than 40% on the year.

The latest inflation figures immediately raised the question of what happens next. The optimistic view is that inflation could have been worse and that fuel prices may fall once the Iran war ends. The riskier view is that energy shocks rarely disappear neatly. History suggests caution.

Is that true? In the last three energy crises, the two embargoes in the 1970s and the 2022 Ukraine war, gasoline prices rose quickly. Price increases took a year after the initial shock to peak. The increased cost of transportation acts as a 'tax' on all households, with the greatest impact being felt by low-income and middle-class households.

But the relatively stable core inflation rate may make the early days of the new chairman of America's central bank, the Federal Reserve, easier. Kevin Warsh will join 11 colleagues for his first meeting of the Federal Open Market Committee (FOMC), which meets on 16-17 June to decide interest rates.

Fedwatch

The relative calm in core inflation means there is a strong probability that at the June meeting the FOMC will hold interest rates at their current 3.50%-3.75%.

But the expectation that inflation may stay at an elevated level for the rest of this year means that hopes of a rate cut could run into the sand. Rather, by the end of this year, the federal funds rate could be 0.25 percentage points higher.

Expectations obviously can be wrong. Both Kevin Warsh and the man who appointed him - President Trump - want to see a lower federal funds rate. Yet it is the task of the Federal Reserve to try to achieve maximum employment, stable prices, and moderate long-term interest rates.

Some data could support the case for lower interest rates, particularly as borrowing costs remain painful. Yet the American economy is still expanding, stock markets are close to all-time highs, and unemployment remains low, under 5%.

Wages are growing, but for many Americans they are not keeping pace with the cost of living. Mortgage rates above 6% add to the pressure. The affordability crisis felt by many reflects the gap between earnings and higher prices. Since 2017 average earnings have grown by more than 40% but home sale prices have risen more than 80% and rents more than 50%.

Gold in an inflationary world

As the Dollar progressively loses purchasing power — more than 20% of that power has gone since 2020 — many people look for ways to preserve value. Gold is one long-standing option. The dollar price of gold has dropped almost 14% in the last month but is still 22% higher than a year ago. Compared with Bitcoin, gold has been more resilient over the past year. Bitcoin is down more than 40% since this time last year.

Inflation eats fiat currency's purchasing power. If inflation at 4% lasts for a year, $100 will have purchasing power of just over $96. If inflation were to endure at that level, the purchasing power of fiat currency would be cut roughly in half in 18 years. The Federal Reserve has long targeted inflation of 2% per year.

If the past is any guide, higher interest rates would normally put pressure on gold prices. But we are living in a very different world, where longer-term structural worries - such as the US total public debt, already above 120% of GDP and moving closer to $40 trillion - are becoming serious.

The gold price decline is so far smaller than the 30% correction during the 2008 financial crisis and the similar drop seen during the 2020 pandemic shock. The apparently buoyant US market mood is heavily influenced by the heady valuations given to a handful of tech stocks. Their future is, obviously, uncertain.

Against these uncertainties and paradoxes, it is understandable that many people look again at hard assets. Gold is one such asset - and with Glint, clients can buy, hold and spend allocated gold through the Glint Mastercard.

For UK clients: At Glint, we make every effort to demonstrate a balanced conversation between gold, silver, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.

For US clients: Graphic representations of value are for illustrative purposes only. The Glint debit card is issued by Sutton Bank, member FDIC. The sale, purchase and storage of precious metals are offered by Glint and not Sutton Bank. Your investment in precious metals through Glint is

·        Not insured by the FDIC.

·        Not a deposit or other obligation of, or guaranteed by, Sutton Bank.

·        Subject to investment risks, including the possible risk of loss of the principal amount invested.

All investments involve risk, including possible loss of principal. The value of precious metals is affected by many economic factors, including but not limited to the current market price, demand, perceived scarcity, and quality of the precious metal. Precious metals can increase or decrease in value. Past performance is not a guarantee of future results. As such, investing in precious metals may not be suitable for everyone.